Question

# 16. A firm’s debt is publicly traded and recently quoted at 95% of face value. The...

16.

A firm’s debt is publicly traded and recently quoted at 95% of face value. The debt has a total face value of \$5 million and is currently priced to yield 6%. The company has 2 million shares of stock outstanding that sell for \$10 per share. The company has a beta of 1.5. The risk-free rate is 3%, the market risk premium is 8%, and the corporate tax rate is 35%. What is the market value of the company’s debt? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit any commas and the \$ sign in your response. For example, an answer of \$1,000.50 should be entered as 1000.50.)

17. A firm’s debt is publicly traded and recently quoted at 90% of face value. The market value of the company’s debt is \$9 million. The market value of the company’s equity is \$27 million. The book values of the company’s debt and equity are \$10 million and \$20 million, respectively. What is the equity capital weight that should be used to calculate the firm’s WACC? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit the % sign in your response. For example, an answer of 15.39% should be entered as 15.39.

16.

 Face value of debt \$        5,000,000 Market value as a %age of face value 95% Market value of debt \$        4,750,000 =95% * 5,000,000

17.

The market value of the company's debt = \$ 9 million

The market value of the company's equity = \$ 27 million

For the calculation of WACC, the market value are considered.

Hence, the equity capital weight that should be used to calculate the firm’s WACC = 27 / (27+9) = 75.00%

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